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Strong recovery expected in festive season

About the stock: Given its multi-distribution channel approach and robust supply chain infrastructure, TCNS has emerged as the market leader in women’s ethnic space through its three popular home grown brands.

* TCNS follows an asset light business model, with production outsourced on a job work basis. This enables the company to generate high RoIC

* Healthy balance sheet with cash reserves worth | 150+ crore

Key highlights:

* TCNS’ revenue recovery has been sluggish with sales reaching 100% of preCovid levels vs. other lifestyle retailers posting 120-140% recovery rate in Q1FY23. It mainly caters to office, festive ethnic wear for women that was slow to pick up post economy re-opening vs. other segments (western wear)

* We envisage a material improvement in operating metrics, going ahead, on the back of a gradual recovery in SSSG (double digit growth) during festive season. Also, after muted store addition pace in the past two years, TCNS has embarked on an aggressive store addition with plan to open 100+ stores in FY23 (54 stores added in FY20)

* Over the past two years, key agenda of TCNS was conserving balance sheet strength with a conservative approach on the working capital front (down 5% vs. pre-Covid levels). This may have led to revenue loss but with robust cash on the books (| 150 crore), the company is now well geared up to accelerate its growth trajectory. It has advanced its inventory purchases by two months to launch the season and is maintaining a healthy inventory

What should investors do: Since our initiation report, the stock has appreciated ~65% (from | 400 in April 2020 to | 660 in September 2022). With normalisation of business scenario and renewed impetus on growth by the company, the financial performance is expected to improve in ensuing quarters.

* We maintain BUY recommendation on the stock

Target Price & Valuation: We value TCNS at | 800 i.e. 3x FY24E EV/sales (earlier TP: |940).

Key triggers for future price performance:

* Undertaking category expansion (beyond its core ethnic wear) in a bid to tap opportunities across non-apparel categories. Foraying into make-up, colour cosmetics under brand ‘Aurelia’. Over longer term, the management aspires to achieve ~20% contribution from the non-apparel segment

* Continues to scale up its omni distribution channel with new business models via third party market place & creating ‘online-first’ product ranges

* Has set up a new integrated warehouse (~1.4 lakh sq ft) to enhance supply chain and scale up its B2C delivery efficiency

Alternate Stock Idea: Apart from TCNS, in our retail coverage we also like ABFRL.

* ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (| 21000 crore) by FY26E, translating to 15% CAGR in FY20-25. BUY with a target price of | 370/share

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